Published December 3, 2008

Expenses eating into Tung Lok's profits

By JAMIE LEE

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PROFITS dished out by Tung Lok Restaurants over the past few years have been less than piping hot.

For its fiscal half-year ended September, the F&B group turned in $2.51 million in net losses, reversing a net profit of $6,000 for the previous corresponding period.

Six-month revenue dipped just 4 per cent year-on-year to $33.7 million from $35.1 million - but expenses and losses from joint ventures (JVs) and associate businesses continued to go up. Tung Lok posted a 5.13 per cent increase in other operating and administrative expenses, as well as losses from JVs and associates, to $26 million from $24.7 million a year ago.

These were due to higher advertising spending, utilities and staff training, losses from its manufacturing joint venture as well as $600,000 in impairment charges for one of its overseas operations, which it later identified, following a Singapore Exchange query, as a joint-venture outlet in China 'which had not been performing well'.

The company needs to take stock of its management of expenses and its joint ventures.

From fiscal 2006 (spanning April 2005 to March 2006) to fiscal 2008, total expenses and losses in joint ventures as well as in associates have continued to go up - and at a faster pace than the increase in sales.

Tung Lok reported $42,273 in such expenses in FY06, $47,456 in FY07 and $52,644 in FY08. Expenses jumped 12.3 per cent from FY06-07, versus an 8 per cent increase in revenue in the same period. For FY07-FY08, expenses surged 10.9 per cent against a 9 per cent rise in sales.

Earnings hit

While the company has remained in the black over the last three fiscal years, its earnings have fallen in FY07 and FY08.

Looking at the net loss posted in the previous six months and against the backdrop of an economic downturn, full-year earnings are expected to be hit in FY09. The group said in its half- year financial statement that it was working to manage its operating costs and improve its quality in food services, and said that the group would 'intensify its marketing efforts and focus its development on a casual dining concept'.

But given that the crux of the problem lies in controlling expenses, marketing campaigns need to be carefully evaluated in terms of costs and benefits.

Stretch ad dollar

Tung Lok's earlier marketing efforts might have reaped some benefits as the restaurant chain is synonymous with Chinese fare in Singapore today. But given that the branding has already made its intended impact, the company should aim to stretch its advertising dollar, as many other companies are doing, to brace itself against the recession.

The company has also expanded rapidly over the last few years - opening up Taiwanese restaurant Shin Yeh and mid-market restaurant Zhou's Kitchen, as well as expanding its My Humble House chain into India and Japan.

But over the last two fiscal years, Tung Lok has registered increasing losses in JVs and new set-ups. It has not given a breakdown of how its JVs and associate businesses have done but, given the thinning profits, it would be more prudent for Tung Lok to consolidate its position in a few ventures, rather than dipping its fingers into too many pies. Management should review its JV portfolio to see if it had been too hasty in expanding.

The F&B chain's sales figures are promising - gross margins have been stealthily maintained at about 70 per cent - which signals that the restaurant is pricing its menu correctly. It is a pity that these have not translated into sustainable earnings for the company as expenses continue to climb.

Tung Lok is known for being avant-garde but it's time to get back to basics. It must manage its spending.